Bank of China Prices Biggest U.S. Dollar Bank Capital Sale

Bank of China Ltd. (3988) raised $6.5 billion selling offshore preference shares in the biggest-ever single tranche U.S. dollar bank capital sale.

The country’s fourth-biggest lender by market value priced the securities at 6.75 percent, according to a person familiar with the matter. Citigroup Inc. raised $6 billion selling 8.4 percent perpetual notes in April 2008 and Bank of America Corp. sold a $6 billion 8 percent perpetual bond in January of that year, according to data compiled by Bloomberg.

“It’s a massive accomplishment,” said Herman van den Wall Bake, the head of fixed-income capital markets in Asia at Deutsche Bank AG in Singapore. “It defied all expectations.”

China’s banking giants are shoring up their capital buffers at a record pace as bad loans spike to the highest level since the global financial crisis. Nonperforming loans touched a five-year high of 694.4 billion yuan ($113 billion) on June 30, 1.08 percent of total advances, making it more urgent for banks to build capital cushions against losses.

Beijing-based Bank of China said it more than doubled the money it set aside for bad loans in the second quarter. It had regulatory approval to issue 40 billion yuan of offshore notes eligible as Tier 1 capital. The lender can also sell as much as 60 billion yuan of Tier 2 notes before the end of 2015.

European CoCos

Bank of China’s $2.5 billion of 5.55 percent 2020 bonds, sold at a 200 basis-point spread in February 2010, are trading at a spread of 227.1 basis points, Bloomberg-compiled prices show. The gap over similar-maturity Treasuries has widened from 214.9 basis points at the end of last month.

Yields on dollar-denominated contingent convertible notes sold by European lenders, similar to the ones sold by Bank of China, have also spiked in the past 10 days, as investors reduced their exposure to riskier assets. The premium over Treasuries of Barclays Plc’s $1.2 billion of 6.625 percent perpetual notes that count as capital has increased 77 basis points this month to 565.4 basis points. The securities convert to stock in the London lender if the bank’s Tier 1 ratio drops to 7 percent.

Bank of China was able to sell the offshore preference shares in either U.S. dollars or euros, according to a preliminary offering circular. The nine banks leading the transaction indicated pricing for only U.S. currency-settled notes.

Order Book

The deal should boost Bank of China’s common equity Tier 1 capital adequacy ratio to 10.12 percent from 9.7 percent, according to the circular. The People’s Bank of China requires the country’s systemically important financial institutions to have a 9.5 percent ratio before the end of 2018.

The offshore preference securities will be converted into Bank of China’s H-shares at HK$3.44 apiece if its Tier 1 ratio falls to 5.125 percent or below. Bank of China’s Hong Kong-listed shares closed down 0.9 percent at HK$3.50.

Orders of $21.8 billion were received for the $6.5 billion sale, people familiar with the matter said today. Some 211 accounts participated and 94 percent of the notes were placed with investors in Asia and 6 percent in Europe. Reg S sales can’t be marketed to investors in the U.S.

“It’s a very interesting market, it’s a new asset class,” said Neeraj Seth, the Singapore-based head of Asian credit at BlackRock Inc. “I think it’s going to be an interesting alternative asset class for high-yield investors in the region.”

By investor type, insurers and sovereign wealth funds took 45 percent, private banks 29 percent, funds 14 percent, corporates 7 percent and banks 5 percent, the people said.

The notes won’t be eligible for inclusion in JPMorgan Chase & Co.’s Asia series of credit indexes or its global measure, according to an Oct. 10 report from the U.S. lender.

The securities are expected to be rated Ba2 by Moody’s Investors Service and BB- by Standard & Poor’s. Some $8.8 billion of dollar-denominated sub-investment grade debt has been issued by Chinese companies in the Reg S market this year, according to data compiled by Bloomberg.